Report and Recommendation of the President

to the Board of Directors

Sri Lanka



Project Number: 43255-01
July 2011


Proposed Loan and Administration of Technical
Assistance Grant
Republic of Indonesia: Urban Sanitation and Rural
Infrastructure Support to the PNPM Mandiri Project


CURRENCY EQUIVALENTS
(as of 30 November 2010 )

Currency Unit rupiah (RP)
Rp1.00 = $0.0001
$1.00 = Rp9,000

ABBREVIATIONS

ADB Asian Development Bank
CDD community-driven development
CIO community implementing organization
CPMU central project management unit
DGHS Directorate General of Human Settlements
DPIU district project implementation unit
MDG Millennium Development Goal
LIBOR London interbank offered rate
MOH Ministry of Health
MPW Ministry of Public Works
NGO nongovernment organization
O&M operation and maintenance
PPIU provincial project implementation unit
PPMS project performance management system
PODES potensial desa (village potential statistics)
PNPM Mandiri Program Nasional Pemberdayaan Masyarakat
(National Program for Community Empowerment)
RIS-PNPM Rural Infrastructure Support to the PNPM Mandiri Project
RPJM Rencana Pembangunan Jangka Menengah
(Medium-Term Development Plan)
SOE statement of expenditure
SUSENAS survey sosial ekonomi nasional (social survey of national
economy)
TA technical assistance













NOTES

(i) The fiscal year (FY) of the Government of Indonesia and its agencies ends on
31 December.
(ii) In this report, $ refers to US dollars.

Vice-President B.N. Lohani, Vice-President-in-Charge, Operations 2
Director General K. Senga, Southeast Asia Department (SERD)
Country Director J. Nugent, Indonesia Resident Mission, SERD

Team leader W. Kubitzki, Senior Social Sector Economist, Indonesia Resident
Mission, SERD
Team members S. Hasanah, Project Officer, Indonesia Resident Mission, SERD
S. Zaidansyah, Counsel, Office of the General Counsel
S. Suzana, Senior Administrative Assistant, Indonesia Resident
Mission, SERD
Peer Reviewer F. Steinberg, Senior Urban Development Specialist, SERD


In preparing any country program or strategy, financing any project, or by making any
designation of or reference to a particular territory or geographic area in this document, the
Asian Development Bank does not intend to make any judgments as to the legal or other status
of any territory or area.

CONTENTS

Page
PROJECT AT A GLANCE
I. THE PROPOSAL 1
II. THE PROJECT 1
A. Rationale 1
B. Impact and Outcome 3
C. Outputs 3
D. Investment and Financing Plans 6
E. Implementation Arrangements 6
III. TECHNICAL ASSISTANCE 7
IV. DUE DILIGENCE 8
A. Economic and Financial 8
B. Governance 8
C. Poverty and Social 9
D. Safeguards 9
E. Risks and Mitigating Measures 10
V. ASSURANCES 10
VI. RECOMMENDATION 10


APPENDIXES
1. Design and Monitoring Framework
2. List of Linked Documents



PROJECT AT A GLANCE


1. Project Name: Urban Sanitation and Rural Infrastructure Support to PNPM Mandiri Project 2. Project Number: 43255-013
3. Country: Indonesia 4. Department/Division: Southeast Asia Department/Indonesia Resident Mission
5. Sector Classification:
Sectors Primary Subsectors
Multisector Water supply and sanitation

Social protection
6. Thematic Classification:
Themes Primary Subthemes
Social development Human development
Environmental sustainability

Urban environmental improvement
6a. Climate Change Impact
No Climate Change Indicator available.

6b. Gender Mainstreaming
Gender equity theme (GEN)

Effective gender mainstreaming (EGM)
Some gender benefits (SGB)

No gender elements (NGE)

7. Targeting Classification:
Targeted Intervention
General
Intervention
Geographic
dimensions of
inclusi ve
growth
Millennium
development
goals
Income
poverty at
household
level


8. Location Impact:
National High
9. Project Risk Categorization: Low


10. Safeguards Categorization:
Environment B
Involuntary resettlement B
Indigenous peoples C
11. ADB Financing:
Sovereign/Nonsovereign Modality Source Amount ($ Million)
Sovereign Project loan Ordinary capital resources 100.0
Total

100.0

12. Cofinancing:
No Cofinancing available.

13. Counterpart Financing:
Source Amount ($ Million)
Beneficiaries 8.0
Government 27.6
Total 35.6
14. Aid Effecti veness:
Parallel project implementation unit No
Program-based approach No


I. THE PROPOSAL
1. I submit for your approval the following report and recommendation on a proposed loan
to the Republic of Indonesia for the Urban Sanitation and Rural Infrastructure Support to the
PNPM Mandiri Project.
1
The report also describes proposed administration of technical
assistance (TA) to be provided by the Japan Fund for Poverty Reduction for Strengthening
Sanitation Planning and Efficiency Improvement, and if the Board approves the proposed loan,
I, acting under the authority delegated to me by the Board, will approve the administration of
TA.
2


2. The project forms part of the Government of Indonesias ongoing flagship poverty
reduction programthe National Program for Community Empowerment (PNPM Mandiri),
which was launched in 2006 with the commitment to reduce poverty by adopting a community-
driven development approach and providing direct support to poor rural and urban communities
to improve essential social services and basic infrastructure. The project will be implemented in
a geographic slice of the PNPM Mandiri Program and will include about 600 rural communities
in four provinces and 1,350 poor urban neighborhoods in 34 cities. The project is included in the
Indonesia country operations business plan, 20102012.
3


II. THE PROJECT
A. Rationale
3. The government requested Asian Development Bank (ADB) support to scale up ongoing
assistance to the PNPM Mandiri scheme to (i) upgrade basic rural infrastructure in poor villages
in provinces covered by ongoing ADB-supported projects, and (ii) promote community-driven
sanitation development to contribute to achieving the Millennium Development Goal (MDG)
target to halve, by 2015, the proportion of people without sustainable access to basic sanitation.

4. Population below the poverty line in Indonesia declined by 1.51 million from 32.53 million
in March 2009 to 31.02 million in March 2010. While continued poverty reduction during a
period of significant external uncertainties is a good achievement, the poverty headcount
remains quite large. The causes of poverty include lack of access to basic services (such as
health, education, safe water, and sanitation); absence of economic opportunities; limited
access to capital; and poor rural connectivity and infrastructure. The poor are vulnerable to
external shocks and the large numbers of near poor are at risk of falling back into poverty in
the event of sickness, natural disaster, harvest failure, rising food prices, or economic recession.

5. The government has made poverty alleviation a development priority. The Medium-Term
Development Plan (RPJM), 20102014 targets average growth of 6%7% per year, with a
reduction in the poverty rate from 14.2% in 2009 to 8%10% by 2014. The governments
foremost poverty reduction program is PNPM Mandiri, which provides assistance to poor rural
and urban communities nationwide through up to three cycles of block grants for improving
essential social services and basic infrastructure. The RPJM, 20102014 includes PNPM
Mandiri as a development tool to accelerate poverty alleviation with an indicative budget
allocation of $6,754 million over 5 years for seven PNPM programs.
4


1
The project is reflected in the governments blue book as (i) Rural Infrastructure Support National Community
Empowerment Program, Phase 3; and (ii) Community-Based Water Supply and Sanitation Project, Phase 1.
2
The design and monitoring framework is in Appendix 1.
3
ADB. 2009. Country Operations Business Plan: Indonesia, 20102012. Manila.
4
PNPM programs included in the RPJM are the PNPM Urban ($664 million); PNPM Rural ($5,420 million); PNPM
Regional Infrastructure for Social and Economic Development ($132 million); PNPM Rural Infrastructure
($335 million); PNPM for sanitationSANIMAS ($37 million); PNPM for water supply and sanitationPANSIMAS
2

6. ADB is supporting the governments PNPM Mandiri scheme through two projects: (i) the
Rural Infrastructure Support to the PNPM Mandiri Project (RIS-PNPM) for $50.0 million;
5
and
(ii) the RIS-PNPM Project II for $84.2 million.
6
Both projects include assistance for community
mobilization, and provide block grants to upgrade basic rural infrastructure in 2,160 villages in
four provinces (Jambi, Lampung, Riau, and South Sumatra
7
). More than 3.5 million poor people
will benefit from infrastructure improvements in their villages, including newly constructed roads
and small bridges, upgraded footpaths and drainage, and improved sanitation and water supply
facilities. Building on lessons and achievements of both projects, the proposed new project will
follow a community-driven development approach.
8


7. Limited access to rural infrastructure. Infrastructure investments, which accounted for
more than 6% of gross domestic product before 1997, fell to a low of 2% in 2000 and have only
reached 3% in 2009, reflecting a sharp decline in public and private spending. As a result,
infrastructure conditions in many rural areas are alarming. Rural roads are deteriorating
because of inadequate maintenance. About 50% of rural villages are not connected by asphalt
roads and more than 10% of all villages are inaccessible even by four-wheel-drive vehicles at
certain times of the year. Poor roads or no roads mean that government services are
inaccessible; higher transportation costs cause an additional burden for poor and remote
communities. In addition to poor road conditions, infrastructure needs related to water supply
need special consideration. While the MDG target set for access to safe water sources in rural
areas is 65.8% of households, only 45.7% of rural households have sustainable access to
improved water sources. The percentage of rural communities with access to sanitation facilities
is even more alarmingonly 34%. Furthermore, it is estimated that about 90 million people in
rural communities have no access to electricity. The four project provinces (Jambi, Lampung,
Riau, and South Sumatra) have high rural poverty and unequal access to infrastructure, with a
total of almost 4 million poor people in 2009. South Sumatra (16%) and Lampung (20%) had
poverty incidence well above the national average.

8. Limited access to sanitation. While Indonesia has generally made good progress
toward accelerating achievement of the MDGs, the MDG targets for access to basic sanitation
need special attention. The percentage of Indonesians with access to improved sanitation
facilities has doubled since 1993, but progress has been slower than in other countries in the
region at similar levels of economic development. In 2009, only 51% of the national population
had access to improved sanitation, while the MDG target for accessing basic sanitation facilities
is 62.37% of the population by 2015.
9
The poor often do not have access to safe water sources

($469 million); and PNPM Support for Poor and Disadvantaged AreasSPADA ($277 million). In 2010, the
government increased the allocation for PNPM Mandiri to $1.3 billion (from $1.1 billion in 2009).
5
ADB. 2008. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the
Republic of Indonesia for the Rural Infrastructure Support to the PNPM Mandiri Project. Manila.
6
ADB. 2009. Report and Recommendation of the President to the Board of Directors: Proposed Loan to the
Republic of Indonesia for the Rural Infrastructure Support to the PNPM Mandiri Project II. Manila.
7
The RIS PNPM has been completed and closed in mid 2011, while the RIS PNPM II is currently being implemented
ans scheduled for completion in late 2013.
8
Key lessons from previous PNPM initiatives for good project design and implementation include (i) community
control of decision making over resources and investment choices; (ii) simple and transparent funds flow
arrangements with direct transfers to community accounts; (iii) comprehensive facilitation support, including social
facilitators to ensure full community participation, and engineering facilitators to oversee technical quality of civil
works; (iv) strong accountability procedures, such as public disclosure of budgets and contracts; (v) village
management of funds and procurement matters; and (vi) training for communities in establishing effective
mechanisms to operate and maintain new infrastructure.
9
In Indonesia, sanitation facilities are defined as those that provide safe, hygienic, and convenient facilities that
prevent the user and the immediate environment from coming into contact with human excreta. Improved sanitation
facilities are defined to include flush and pour flush toilets that are linked to a piped sewer system or a septic tank.
Improved pit latrines with a slab seal and ventilation are also classified as improved sanitation facilities, as are
3

and basic sanitation facilities, which has severe consequences for their health and livelihoods.
Waterborne diseases have a high cost in terms of health among those without access to
improved water and sanitation. Two of the most important causes of mortality for children under
5 years old are fecal-borne diseases, and waterborne diseases, including cholera, diarrhea, and
typhoid fever, which are linked to use of unprotected water, poor sanitation, and inadequate
awareness among communities of hygienic practices. Some 30% of Indonesians suffer from
waterborne diseases.

9. Efforts to increase basic sanitation coverage are complicated by population growth,
especially in urban areas where growth rates are higher than the national rate. At the current
national population growth rate1.3% per yearan additional 2.8 million Indonesians will
require basic sanitation facilities every year from now until 2015, adding to more than
100 million people currently without basic sanitation.

The main challenges to increasing access
to improved sanitation are summarized below:
(i) The regulatory framework for water supply and sanitation is less than adequate.
(ii) The growth of urban populations has been greater than the development of water
and sanitation infrastructure. Investments in connection rates of urban water
supply have failed to keep pace with the growth in urban populations while the
use of household on-site sanitation systems has not been accompanied by public
investments in collection, treatment, and disposal infrastructure.
(iii) Community awareness of the importance of clean water use and sanitation
remains low. While almost all households boil water for drinking, 48% of such
water still contains E. coli.
(iv) Responsibility for water and sanitation management has been devolved to local
governments, but local capacity to ensure that adequate systems are in place or
operating correctly is limited.
B. Impact and Outcome
10. Corresponding to the overall objective of PNPM Mandiri, the impact of the project will be
reduced poverty in the project areas. The outcome will be improved access to service delivery
and healthy livelihoods for the poor, near poor, and women in the project communities.

C. Outputs
11. The project will have three outputs: (i) strengthened capacity for community planning
and development, (ii) improved rural basic infrastructure, and (iii) improved sanitation services.

12. Output 1: Strengthened capacity for community planning and development. The
project will support and strengthen community empowerment and capacity to prioritize, design,
implement, manage, and monitor community-based projects. Social mobilization and community
facilitation are crosscutting activities that will occur at all stages of the community empowerment
process and are keys for ensuring pro-poor investments and sustainability. Following the PNPM
Mandiri guidelines, the project will deploy community facilitators
10
to assist communities to carry
out poverty mapping, identify problems and needs, evaluate community implementation
capacity, develop efficient planning and decision-making processes, establish and run
community implementing organizations (CIOs), formulate development plans and specific
investment plans to be financed by block grants, prepare technical designs and implement civil
works, and formulate and implement operation and maintenance (O&M) plans to ensure the

composting toilets. Unimproved sanitation facilities include toilets that drain to an open sewer, ditch, open drain,
stream, river or open field, pit latrines without slab coverings, buckets, and hanging toilets.
10
The government will contract and finance community facilitators.
4

sustainability of completed facilities. Community facilitators will be organized in teams, each
consisting of facilitators for (i) social development, (ii) technical matters, and (iii) overall project
management. At least 30% of the facilitators will be women. As successfully implemented under
the ongoing RIS-PNPM projects, each participating community will work with the project through
a CIO (an existing village organization or a new project organization).
11


13. To assist communities in rural areas to design and implement investments plans to
upgrade basic infrastructure financed by block grants provided under output 2, facilitators will be
recruited from teams engaged under ongoing RIS-PNPM projects. The executing agency will
identify experienced and well-performing facilitators to be employed under the project.

14. To assist communities in urban neighborhoods to establish and improve sanitation
facilities financed by block grants under output 3, the executing agency will engage new
facilitators with good experience in participatory planning methods, community mobilization and
empowerment, and specifically in community-based sanitation services. Facilitators assigned for
community empowerment will be trained specifically on approaches to foster sanitation and
hygiene behavioral changes. Facilitators assigned to provide technical guidance on community-
based sanitation will be trained on suitable and simple sanitation technologies and appropriate
construction methods.

15. Output 2: Improved rural basic infrastructure through community development
grants. Block grants
12
will be provided to villages to upgrade basic infrastructure to meet local
needs identified by the village community. Consistent with the PNPM Mandiri guidelines, the
menu of investment opportunities for communities will be open except for a short negative list of
activities prohibited by the government or ADB policies. Selection of community investments will
be based on the guidelines prepared for ongoing RIS-PNPM projects. The project will allocate
two cycles of block grants of Rp250 million each for about 600 villages. After the completion of
the first cycle of block grants, the executing agency, assisted by the district and provincial
project implementation units (DPIUs and PPIUs), will carry out a village performance evaluation.
Only villages that are evaluated as good performers will continue to receive the second cycle of
block grants. Poorly performing villages will be excluded for the second round of block grants
and replaced by new villages.

16. Out of the 600 targeted villages, about 200 villages have already received one cycle of
block grants under the overall PNPM program financed by the governments own resources.
The remaining 400 villages, selected from a list of the poorest villages in the country, have not
received any PNPM support. All 600 villages are located in the 215 subdistricts in Jambi,
Lampung, Riau, and South Sumatra covered by the ongoing RIS-PNPM projects. Villages will
be selected based on poverty incidence ranking using the latest available data.

The list of
villages will be confirmed by the Coordinating Ministry of People Welfare and verified by
provincial and district governments to ensure that the poorest villages are selected and that no
better-off villages are included. The executing agency will replace selected villages that are not
willing to participate or have been affected by force majeure or disaster (which would encumber
their participation) with other poor villages within the project subdistricts.


11
Overall CIO membership will comprise at least 40% women. The CIO representative committee will consist of five
members, including at least two women. The CIO will be legalized by the village or neighborhood head and
registered with the kecamatan (subdistrict) head, which is a prerequisite for opening a CIO bank account. CIO
decisions will be validated in village or neighborhood meetings with at least 60% household attendance.
12
Under this project, a block grant is defined as a fixed sum of money granted by the national government, which is
transferred in three tranches to a selected community that has met certain criteria for the financing of construction
of (i) basic rural infrastructure, or (ii) sanitation facilities in urban areas. A cycle of block grant consists of at least
three block grants to a selected community.
5

17. Following the approach established under the ongoing RIS-PNPM projects, block grants
will be transferred directly to community bank accounts managed by the CIOs. The CIO will take
the lead in developing investment plans, with assistance from community facilitators and the
DPIUs. After the village investment plans, which include the final technical designs and cost
estimates, have been approved at a village assembly and submitted to the DPIU for approval, a
contract will be executed between the CIO and the DPIU and the first installment of the block
grant will be released. Communities will undertake civil works with technical guidance from the
community facilitators, DPIUs, and project management consultants. The proposed project will
utilize the same funds flow mechanism for block grants as the ongoing RIS-PNPM projects.

18. Output 3: Improved sanitation services through neighborhood development
grants. The project will provide block grants of about Rp350 million to about 1,350 urban
neighborhoods in 34 cities in the provinces of Central Java, DI Yogyakarta, East Java, South
Sulawesi, and North Sulawesi to improve community-driven sanitation services including
(i) construction of public bathing, toilets, and washing facilities; (ii) improvement of communal
sewerage systems and waste treatment;
13
and (iii) improvement of disposal or reuse systems.
14

To ensure that community sanitation facilities established under the project will be integrated in
city development plans and linked to city sewerage systems, only neighborhoods located in
cities with an approved city sanitation strategy will participate in the project. By 2011, local
governments in the project provinces are expected to have endorsed strategies for 43 cities. To
assure support from the respective city administrations, local governments will provide a firm
letter of confirmation documenting their readiness to participate in the project and their
contributions to support community-led sanitation development.

19. Given the limited community awareness on the importance of sanitation and hygiene,
and the lack of understanding on community-driven sanitation technologies, the project will
allow sufficient time for the community empowerment process. Facilitators will assist local
communities to develop their own action plans for sustainable sanitation services and improved
hygiene and heath environments. The process will start with the establishment of a long list of
communities showing interest to participate. Based on selection criteria,
15
neighborhoods will be
chosen to participate in the project. Facilitators will help community members to (i) identify
issues and needs related to health, hygiene, and sanitation; (ii) formulate inclusive and
sustainable sanitation plans with investment plans to be financed by block grants; (iii) prepare
technical designs; (iv) implement civil works; and (v) formulate and implement O&M plans to
ensure the sustainability of completed facilities.

20. The implementation mechanism will be similar to output 2 and follow good practices
established under RIS-PNPM projects. Each participating neighborhood will work through a
CIO; block grants will be transferred directly to community bank accounts; procurement process
and fund flow mechanisms will be in line with procedures described under output 2 and
established under RIS-PNPM projects.




13
Treatment systems could include communal septic tanks, bio-digesters, baffled reactors, anaerobic filters, ponds.
14
This could include river disposal, sludge drying, use as fertilizer, and sucking by sludge trucks.
15
Neighborhoods will be selected based on the following: (i) the neighborhood shall be located in cities with an
approved City Sanitation Strategy; (ii) the community members within the neighborhood shall have agreed to
design and implement sanitations facilities; (iii) the CIO for the neighborhood shall have been established and
accountability and governance mechanism shall have been in place; and (iv.) the community members within the
neighborhood shall indicate their willingness to improve overall hygiene and health environments in the
neighborhood.

6

D. Investment and Financing Plans

21. The government has requested a loan of $100 million from ADBs ordinary capital
resources to help finance the project. The loan will have a 25-year term, including a grace
period of 5 years, an annual interest rate determined in accordance with ADBs London
interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year
on any undisbursed amount of the loan, and such other terms and conditions set forth in the
draft loan agreement. The project is estimated to cost $135.6 million equivalent, which includes
contributions from (i) the central government of $21.5 million, (ii) local governments of
$6.1 million, and (ii) beneficiaries of $8.0 million.

Table 1: Project Investment and Financing Plan
($ million)
Item ADB
Central
Government
Local
Governments Beneficiaries Total
Base Costs
Block grants for rural basic infrastructure 33.5 0 0 0 33.5
Block grants for urban sanitation 52.5 0 0 0 52.5
Beneficiary contributions 0 0 0 8.0 8.0
Community facilitation 0 10.3 0 0 10.3
Training and workshops 4.1 0 0 0 4.1
Community preparation (roadshows) 0 1 0 0 1.0
Consulting services 7.9 0 0 0 7.9
Project management 0 0.7 5.3 0 6.0
Taxes and Duties 0 1.0 0.3 0 1.3
Contingencies
a
2.0 1.5 0.5 0 4.0
Financial Charges
b
0 7.0 0 0 7.0
Total
c
Share of Total (%)
100.0
73.8
21.5
15.9
6.1
4.5
8.0
5.9
135.6
100
a
Physical contingencies computed at 10% for civil works and 5% for training and workshops. Price contingencies
computation includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity
exchange rate of 5.6% for 2011 and 6% for 20122014.
b
Includes interest and commitment charges. Interest during construction for the ADB loan has been computed at the 5-year
forward London interbank offered rate plus a spread of 0.3%. Commitment charges for the ADB loan are 0.15% per year
to be charged on the undisbursed loan amount.
c
In mid-2010 prices.
Source: Asian Development Bank estimates.


E. Implementation Arrangements

22. The implementation arrangements are summarized in Table 2 and described in detail in
the project administration manual.
16
The executing agency for the project is the Directorate
General of Human Settlements (DGHS), within the MPW. The DGHS will also act as the key
project implementing agency. The project will be implemented over 4 years, from January 2012
to December 2015. In the four provinces of Jambi, Lampung, Riau, and South Sumatra under
output 2, the project will use the existing implementation arrangements established under the
ongoing RIS-PNPM projects; and continue working with the established district and province
implementation units. At new project locations under output 3, where sanitation-related project
activities will be implemented, the DGHS will establish project management units at the
respective city administrations. Tasks of these new PPIUs and DPIUs will comprise the same
responsibilities assigned to PPIUs or DPIUs under the RIS-PNPM projects. The MOH will be
closely involved in the preparation of training and awareness strategies to promote sanitation
and hygiene behavioral changes.


16
Project Administration Manual (accessible from the list of linked documents in Appendix 2).
7

Table 2: Implementation Arrangements
Aspects Arrangements
Implementation period January 2012December 2015
Estimated project completion date 31 December 2015
Project management
(i) Oversight body Oversight body for the National Program for Community Empowerment

(ii) Executing agency Directorate General of Human Settlements (DGHS), within the Ministry of
Public Works (MPW)
(iii) Key implementing agencies DGHS .
(iv) Project implementation unit Central project management unit, DGHS, MPW, 5 staff
Provincial project implementation units (PPIUs) in nine participating provinces,
35 staff in each PPIU
District implementation unit in 71 districts and cities, 35 staff in each unit
Procurement Community
Procurement
2,550 contracts $86.0 million
Consulting services 3,015 person-months $7.9 million
Retroactive financing and/or
advance contracting
None
Disbursement The loan proceeds will be disbursed in accordance with ADBs Loan
Disbursement Handbook (2007, as amended from time to time) and detailed
arrangements agreed upon between the government and ADB.
Source: Asian Development Bank.

23. Except as ADB may otherwise agree, the borrower shall establish immediately after the
effective date, an imprest account at the Bank of Indonesia. The imprest account shall be
established, managed, replenished, and liquidated in accordance with ADBs Loan
Disbursement Handbook (2007, as amended from time to time), and detailed arrangements
agreed upon between the borrower and ADB. The currency of the imprest account shall be in
US dollars. The statement of expenditure (SOE) procedure may be used for reimbursement of
eligible expenditures for any individual payment not exceeding $50,000 and to liquidate
advances provided into the imprest account.

III. TECHNICAL ASSISTANCE
24. The government has requested capacity development TA from ADB to support project
implementation. In partnership with ongoing initiatives, the TA seeks to (i) strengthen the quality
of community facilitation to improve infrastructure built under the PNPM by consolidating training
modules and materials related to community mobilization and technical matters associated with
community-constructed infrastructure (including affordable and replicable technologies for
community-driven sanitation development); (ii) promote demand-driven public and private
training supply, including development of strategies to establish quality assessment schemes for
training modules, trainers, and training providers, and to procure training services from private
sector providers; and (iii) develop strategies to scale up and anchor sanitation-related training
and advocacy.

25. To assess impacts of sanitation interventions and guide future strategies to advance
community-driven sanitation, the TA will include a baseline survey on sanitation in selected
neighborhoods at the project start and carry out subsequent impact assessments after the first
and second years. The TA is estimated to cost $1.0 million, which will be financed on a grant
basis by the Japan Fund for Poverty Reduction and administered by ADB. The government will
provide in-kind support of about $500,000. To support activities under the TA, UNICEF has
indicated that it will provide national and international consulting services to assist in
8

consolidating training modules and materials, preparing a certification scheme for training
providers and trainers, and developing advocacy strategies to promote community-based
sanitation.

IV. DUE DILIGENCE
A. Economic and Financial
26. The expected economic benefits of the project are significant and include (i) improved
public health status and reduced per capita costs for health care treatment as a result of the
increased coverage of sanitation services and improved hygiene, particularly in densely
populated urban neighborhoods of participating cities; (ii) reduction in pollution; (iii) sustained
impacts on the economies of participating villages by improving essential rural infrastructure and
access to basic services; and (iv) considerable short-term employment generation.

27. Project interventions will be identified by community members through a participatory
community-driven development (CDD) process. CDD approaches provide good quality
community-level infrastructure at significantly lower costs than technically comparable projects
using traditional (non-CDD) modes of government contracting. Evaluations of CDD
infrastructure projects using local government unit costs and local contractor costs
demonstrated that the investment costs of CDD-provided infrastructure were on average only
63.7% of local government costs.

28. Local manual labor will largely carry out the implementation of civil works financed by
block grants. The project is projected to generate about 6 million person-days of short-term
employment at an average wage rate of $5 per day, and additional short-term income of
$30.0 million. As this employment is largely provided in the agricultural off-season, it has
particular benefits for reducing unemployment and vulnerability among the poor. There is also
evidence that increased demand for manual labor has a broader impact in raising the wages of
unskilled workers outside the project areas, which contributes to poverty reduction.

29. The project is expected to have significant impacts on the economies of participating
communities. Similar types of investments have been shown to yield an average economic
internal rate of return of 28%68%. Economic benefits arise from opening access to markets
and lowering transport costs in the case of rural roads and bridges, increased incomes,
additional crop cycles from improved irrigation, and time saved in collecting water and health
benefits from water and sanitation projects. Overall, project investments are expected to benefit
more than 1.3 million people in more than 270,000 households.

B. Governance
30. Community-based planning mechanisms are the key to instituting good governance
practices. The project will strengthen the ability of communities to articulate their needs and to
seek support for their development plans, and will improve the respective district governments
ability to respond to the demands of poor communities. As the project will target poor villages
and urban neighborhoods, capacity building activities will directly benefit the poor by providing
them with the means to draw the attention and resources of local governments to their
development needs.

31. Previous community development projects indicate a risk of elite capture. This risk is
minimized by several features of the project design, including (i) community poverty mapping;
(ii) establishment of CIOs with representation of women, minority, and marginalized groups
among the community representatives; and (iii) transparent mechanisms of publicly displaying
9

decision making processes, tender documents, fund transfers and disbursements of block
grants, and progress of civil works. All civil works will be contracted to the CIOs and will be
undertaken primarily through manual labor. This will help ensure that the jobs generated by the
project are filled by community members. Infrastructure projects involving procurement of large
amounts of goods and services for civil works may be prone to corruption. To a large extent, this
will be mitigated through community management of the planning, oversight, and
implementation of the civil works. In addition, the existing financial management systems and
fiduciary controls under PNPM Mandiri, which have been developed with assistance from
international development partners, are sound and have adequate checks and balances to
minimize corruption risks. Finally, the projects complaints and problems handling unit will
review and address any grievances of project stakeholders in relation to the project, any of the
service providers, or any person responsible for carrying out the project.

32. ADBs Anticorruption Policy (1998, as amended to date) was explained to and discussed
with the government and the Ministry of Public Works. The specific policy requirements and
supplementary measures are described in the project administration manual.

C. Poverty and Social
33. The project will target poor communities in less developed villages and urban
neighborhoods that lack basic services and infrastructure. The selected villages and
neighborhoods will have higher than average poverty levels and lower than average
achievement levels for MDGs. Improvements in basic infrastructure will improve income-earning
opportunities and increase the availability and accessibility of education and health services for
the rural poor and near poor. Improved sanitation and cleaner environments resulting from
project activities in poor neighborhoods will reduce diseases linked to unsafe water and poor
hygiene, and will thus contribute to improving the health of the poor. This benefit will particularly
accrue to infants and children, who are more vulnerable and suffer more frequently and severely
from diseases caused by poor sanitation and hygiene practices. A gender action plan, which
has been included in the project design, aims to enhance womens ability to participate in the
decision-making process and to ensure that women and men in the project sites benefit equally
from increased access to improved basic infrastructure and social services.

D. Safeguards
34. Land acquisition and resettlements. The project has been classified category B as the
scope of land acquisition and resettlement is expected to be insignificant. In urban
neighborhoods, the project might require limited land acquisition occasionally for small
community sanitation facilities, but will not entail any resettlement of people, relocation of
houses, or significant impact upon productive land or other productive assets. It is expected that
small land acquisitions will be provided by project beneficiaries voluntarily. ADBs Safeguard
Policy Statement (2009) and its requirements will be adopted if any compensation is needed in
case of land acquisition. Safeguard specialists at national, provincial, and district levels have
been included in the consultant packages. The resettlement framework has been prepared.
17


35. Environment. The project is classified environmental category B. Overall, the project
will have significant positive impacts on the quality of life and environment of the project
communities. Because of the small scale of expected civil works, most of the expected negative
effects are site-specific, short-term and temporary, and easily mitigated to acceptable levels.
The environmental assessment and review framework has been prepared.
18


17
Resettlement Framework (accessible from the list of linked documents in Appendix 2).
18
Environmental Assessment and Review Framework (accessible from the list of linked documents in Appendix 2).
10


36. Indigenous peoples. The project is not expected to have any negative impacts on
indigenous peoples. It will not discriminate against them or other marginalized groups. Following
CDD principles, the project will include opportunities for screening project impacts on
indigenous groups and incorporating mitigation measures, if any, into the overall design and
implementation of any investment. In accordance with ADBs Safeguard Policy Statement, the
project has been classified category C.
19


E. Risks and Mitigating Measures
37. The project overall risks are assessed to be medium. The following table summarizes
project key risks and the mitigating measures:

Table 3: Summary of Key Risks and Mitigating Measures

Risks Mitigating Measures
Lack of adequate operation and
maintenance (O&M) can reduce the
benefits from investments and jeopardize
sustainability
Community facilitators and consultants will advise community
members on the importance of O&M; O&M concepts will be a
mandatory part of the investment plans to be approved by the
district project implementation unit.
Lack of understanding of the importance of
sanitation
The attached capacity development technical assistance will help
to consolidate and improve existing awareness strategies, and
scale up and roll out awareness campaigns and training programs
at all levels in the project cities.
Poor technical design and poor
implementation of civil works
Community facilitators and consultants will be carefully selected
and trained to support communities; a monitoring system will be
established to provide additional supervision by government
experts from the respective district and municipality administration

V. ASSURANCES
38. The government has assured ADB that implementation of the project shall conform to all
applicable ADB policies including those concerning anticorruption measures, safeguards,
gender, procurement, consulting services, and disbursement as described in detail in the project
administration manual and loan documents. The government has agreed with ADB on certain
covenants for the project, which are set forth in the loan agreement.

VI. RECOMMENDATION
39. I am satisfied that the proposed loan would comply with the Articles of Agreement of the
Asian Development Bank (ADB) and recommend that the Board approve the loan of
$100,000,000 to the Republic of Indonesia for the Urban Sanitation and Rural Infrastructure
Support to PNPM Mandiri Project from ADBs ordinary capital resources, with interest to be
determined in accordance with ADBs London interbank offered rate (LIBOR)-based lending
facility; for a term of 25 years, including a grace period of 5 years; and such other terms and
conditions as are substantially in accordance with those set forth in the draft loan agreement
presented to the Board.
Haruhiko Kuroda
President
15 July 2011

19
Specific actions have been included in the project: (i) the selection criteria for community investments includes that
indigenous people and other vulnerable groups are part of the capacity building, planning, implementation, and
post-implementation processes; (ii) minority and marginalized groups will be represented on CIOs; and
(iii) indigenous groups will benefit proportionally from easier access to service delivery, rural infrastructure, training,
and construction-related jobs.
Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary
Performance Targets and/or
Indicators
Data Sources and/or
Reporting Mechanisms
Assumptions and
Risks
Impact

Reduced poverty in
the project areas



By 2017:
Number of households in project
villages living below poverty line
reduced by at least 15% from project
baseline




PNPM Mandiri
evaluations
PODES village-level and
National Statistic
(SUSENAS household
surveys)

Assumption
National and regional
governments continue
to support community-
driven development.

Risk
Natural or financial
disasters will impact the
project areas.
Outcome

Improved access to
both service delivery
and healthy
livelihoods for the
poor, near-poor, and
women in the project
communities

By 2014:
About 0.6 million poor people in
600 villages will have access to
improved rural infrastructure and
better service delivery.
At least 50% of villagers in project
villages, of which half are women, are
satisfied with improvements in local
roads, drinking water, sanitation, and
other basic infrastructure.
At least 50% of men and women in
project urban neighborhoods have
increased awareness of sound
hygiene and sanitation practices.
Increase in population with access to
improved sanitation services by 20%
in 2014 from baseline that will be
established at the project start; about
0.5 million people will have access to
improved sanitation and new facilities
in the 34 cities.


PPMS reports
PODES village-level and
SUSENAS household
surveys
Baseline and follow-up
impact evaluation
surveys in target project
areas (Ministry of Public
Works)
Independent NGO
monitoring and
evaluation reports
PNPM Mandiri
management information
system and evaluations


Assumptions
National budget funds
are adequate and
provided in a timely
manner.
Central and local
governments continue
to prioritize reduction of
environmental pollution
in urban areas.



Outputs
1. Strengthened
capacity for
community
planning and
development

By 2014:
Functioning CIOs established in
about 600 villages and 1,350 urban
neighborhoods, with at least 40%
representation of women in each
CIO.
At least two separate planning
meetings for women conducted in
each village and neighborhood.
Medium-term poverty reduction plans
formulated in a participatory manner
in about 600 villages; and
neighborhood sanitation improvement
plans in about 1,350 neighborhoods,
with at least 40% women participation
and 50% of poor residents in planning
meetings.
Well-designed investment and
implementation plans for community-

PPMS reports
Community facilitator
reports
NGO reports
District and city
administration evaluation
reports


Risks
Prioritization and
planning are captured
by a few influential
community members.
A sufficient number of
suitable applicants are
available for
recruitment, training,
and deployment as
effective village
community facilitators.

12 Appendix 1

Design Summary
Performance Targets and/or
Indicators
Data Sources and/or
Reporting Mechanisms
Assumptions and
Risks
driven development projects
formulated and approved in about
600 villages and 1,350 urban
neighborhoods.
2. Improved rural
basic
infrastructure
through
community
development
grants
By 2014:
Two cycles of block grant investments
have been implemented in each of
about 600 rural villages in the project
provinces, addressing community
needs (including those of the poor,
women, and other marginalized
groups).

Gender audits completed for all block
grant investments in about
600 villages.

More than 70% of infrastructure
works are evaluated as being of high
quality and have functioning O&M
arrangements.

At least 230,000 person-months of
immediate employment opportunities
generated in the project villages, with
at least 30% provided to women.


PPMS reports
Impact evaluation
midterm and final reports
NGO monitoring and
evaluation reports
District government
plans and budgets

Assumption
Communities have
surplus labor and
adequate resources to
undertake civil works
and maintenance of
investments.



3. Improved
sanitation
services through
neighborhood
development
grants
By 2014, neighborhood sanitation
improvement block grant investments
(Rp350 million per neighborhood)
have been implemented in each of
about 1,350 urban neighborhoods in
the project districts and cities,
addressing community needs
(including those of the poor, women,
and other marginalized groups).

Community-based sanitation
facilities, in accordance with agreed
criteria and standards, are completed
by the end of 2013 (in about
1,350 neighborhoods)

By the end of 2013, gender audits are
completed for all block grant
investments.

At project completion, more than 80%
of infrastructure works are evaluated
as being of high quality and have
functioning O&M arrangements.

At project completion, at least
500,000 person-months of immediate
employment opportunities are
generated in the project villages with
at least 30% provided to women.
PPMS reports
Impact assessment
report
City administration plans,
budgets, and reports

Assumptions
National, provincial, and
district governments
allocate adequate staff
and resources for
project operating
entities.
District government
counterpart funds are
provided in a timely
manner.
Communities are fully
committed to the project
and have sufficient
resources to maintain
project investments.

Appendix 1 13

Acti vities with Milestones

1. Strengthened Capacity for Community Planning and Development
1.1 Recruitment, training, and deployment of community facilitators (Q3 2011).
1.2 Socialization campaigns completed in project villages and neighborhoods (Q4 2011).
1.3 Community facilitation and planning completed in project villages and neighborhoods,
including separate womens meetings and poverty mapping in cycle 1 (Q4 2011) and
cycle 2 (Q4 2012)
1.4 Selection of investments completed in project villages and neighborhoods (Q4 2011)
1.5 Intervillage meetings for village representatives to support coordination and potential
complementarities between investments starting in Q4 2011
1.6 Community investment plans finalized, O&M plans drafted, and contracts executed
starting in Q4 2011.

2. Improved Rural Basic Infrastructure through Community Development Grants
2.1 Community members trained to implement village infrastructure plans starting
Q4 2011
2.2 Quality and gender audits undertaken starting Q1 2012
2.3 Disbursements of first tranche of grants for investments completed (Q4 2011)
2.4 Disbursements of second tranche of grants for investmentscompleted in Q2 2012
2.5 Disbursements of third tranche of grants for investments completed for cycle 1
(Q2 2012) and cycle 2 (Q2 2012)
2.6 Civil works of community investment projects completed for cycle 1 (Q3 2012) and
cycle 2 (Q4 2012)
2.7 Completion of O&M plans for the built facilities for cycle 1 (Q4 2012) and cycle 2
(Q4 2012)

3. Improved Sanitation Services and Infrastructure through Community
Development Grants
3.1 Carry out roadshows to register community interest starting Q1 2011
3.2 Implementation of training for community members on sanitation awareness and
improvement plans starting Q4 2011
3.3 Implementation of quality and gender audits starting Q1 2012
3.4 Disbursements of first tranche of grants for investments completed (Q4 2011)
3.5 Disbursements of second tranche of grants for investments icompleted in Q2 2012
3.6 Disbursements of third tranche of grants for investments completed for cycle 1
(Q2 2012) and cycle 2 (Q3 2012)
3.7 Civil works of community investment projects completed for cycle 1 (Q3 2012) and
cycle 2 (Q4 2012)
3.8 Community O&M plans for cycle 2 investments finalized for cycle 1 (Q4 2012) and
cycle 2 (Q1 2013)
Inputs

ADB: $100.0 million
Government:
$27.5 million
Beneficiaries:
$8.0 million

Consultants:
3,015 person-months of
national consultants
Community facilitators:
- for rural
infrastructure:
9.600 person-
months
- for the sanitation
component:
13,500 persons-
months

ADB = Asian Development Bank, CIO = community implementing organization, NGO = nongovernment organization,
O&M = operation and maintenance, PNPM = Program Nasional Pemberdayaan Masyarakat (National Program for
Community Empowerment), PODES = Potensial Desa (Village Potential Statistics), PPMS = project performance
management system, Q = quarter, SUSENAS = Survei Sosial Ekonomi Nasional.
Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS
http://www.adb.org/Documents/RRPs/?id=43255-01-3

1. Loan Agreement
2. Sector Assessment (Summary): Sanitation
3. Project Administration Manual
4. Contribution to the ADB Results Framework
5. Development Coordination
6. Economic and Financial Analysis
7. Country Economic Indicators
8. Summary Poverty Reduction and Social Strategy
9. Gender Action Plan
10. Environmental Assessment and Review Framework
11. Resettlement Framework
12. Risk Assessment and Risk Management Plan
13. Technical Assistance for Mainstreaming of Sanitation PNPM Mandiri

Supplementary Documents
14. Sector Assessment (Summary) Rural Infrastructure
15. List of Villages and Cities to be included under the Project
16. List of Ineligible Items